Porter's Diamond ModelThe competitive advantage of nations (Porter's diamond)A. OverviewB. The diamond: four determinants of national competitive advantageC. Diamond as a SystemD. Implications for governmentsE. CriticismsV. The competitive advantage of nationsA. OverviewPorter is a renowned Harvard economics professor. He conducted a comprehensive study across 10 countries to find out what drives success. His company was recently commissioned to study Canada in a report called “Canada at the Crossroads.” Porter believes that standard classical theories of comparative advantage are inadequate (or even wrong). According to Porter, a nation gains a competitive advantage if its businesses are competitive. Businesses become competitive through innovation. Innovation may include technical improvements to the product or production process.B. The Diamond: The Four Determinants of National Competitive AdvantageFour attributes of a nation constitute Porter's "diamond" of national advantage. They are: factor conditions (i.e., the nation's position relative to factors of production, such as skilled labor and infrastructure), demand conditions (i.e., sophisticated customers in the domestic market), related and supporting industries, and the strategy, structure, and rivalry of the enterprise (i.e. conditions for the organization of production factors). companies and the nature of internal rivalry). Factor Conditions Factor conditions refer to inputs used as factors of production, such as labor, land, natural resources, capital, and infrastructure. This sounds similar to standard economic theory, but Porter argues that “key” factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure. “Non-core” or general purpose factors, such as unskilled labor and off-the-shelf materials, can be obtained by any company and, therefore, do not generate a lasting competitive advantage. However, specialized factors lead to heavy and sustained investments. They are harder to duplicate. This leads to a competitive advantage, because if other companies can't easily duplicate these factors, they are valuable. Porter argues that a lack of resources often actually helps countries become competitive (call this the selected factor disadvantage). Abundance breeds waste and scarcity breeds an innovative mindset. These countries are forced to innovate to overcome the problem of scarce resources. How true is it? Switzerland was the first country to experience labor shortages. They moved away from labor-intensive watches and focused on innovative/high-end watches. Japan has expensive land and so its factory space is at a premium. This led to just-in-time inventory techniques (Japanese companies cannot have much inventory. Sweden has a short building season and high construction costs. These two things combined created the need for prefabricated homes. b. Conditions of the question Porter argues that a sophisticated internal market is an important element in producing competitiveness. Companies facing a sophisticated market